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Law Firm Mergers: The Canadian Rationale

Many factors figure into whether a firm remains independent or joins an international one. As global consolidation continues, law firm leaders have to carefully choose which route is best suited to their needs

By February the old Gowling Lafleur Henderson LLP will be gone, joining the pantheon of familiar names extinguished to feed the twin beasts of globalization and growth.

Go big or stay home? It’s a question more than a few law firm strategists are wrestling with.

Scott Jolliffe, the Managing Partner who welded Gowlings into a national firm through a series of four mergers, says he saw the demise of the national, big-firm model about five years ago — ironically, as his creation was really hitting its stride.

“I saw it in the financial meltdown,” he says. “I saw it in the strained and changing relationship with the US. In my perceived hollowing out of Canada with our sources of work – even Canadian-based work – moving outside of Canada. I saw a shrinking legal market for traditional domestic work.

“It all led me to realize that over the next 10 or 20 years, the model for delivering legal services at our level was going to change dramatically and we really had to adapt to these important market changes. We had to adopt an international platform … and it’s too slow, too costly and too ineffective to do it on your own.”

So what he did was negotiate a fifth merger in 15 years – this one with London-based Wragge Lawrence Graham & Co LLP – creating Gowling WLG, a firm with offices in Canada, the UK, Europe, Asia and the Middle East.

Scott Jolliffe is not the only Canadian managing partner to see the effects of globalization hurtling towards his law firm’s existing structure.

In Calgary, Robert Seidel, then Managing Partner of Davis LLP, had many of the same concerns. Davis was a solid mid-market law firm but Seidel felt something had to change to reflect the changing nature of the client base and crack the “mission-critical” Toronto market.

His partners gave him a mandate to look “locally, regionally, nationally and internationally. I set out to be opportunistic with an eye to growth. We didn’t want to get bigger for the sake of it, but having a depth and wealth of resources would be helpful in advising or competing for work that we maybe just didn’t have the heft for, or the depth for.”

In April, culminating several months of negotiations, Davis was folded into DLA Piper LLP – an international behemoth with about 4,200 lawyers – becoming DLA Piper (Canada) LLP.

Some firms, like Davis, are throwing their lot in with international law firm giants; others, like Gowlings, are doing international mergers. Yet strategists say all-Canadian mergers, regional mergers, building a firm based on a niche practice area or even standing pat can also be effective in withstanding the prevailing winds of internationalization.

In Jolliffe’s case, once the decision was made to go international, the question was how. Gowlings had been approached by a few global firms about joining them, he says, which sparked internal discussion and soul searching at the firm.

In the end, he says, “that just wasn’t suited for who we are. We’re proudly Canadian and fiercely committed to our strategy and our internal way of doing things. To become part of another organization, and to give up the things we feel are quite unique to our strategy, would have been a real challenge.

“I realized quite early there was no way the Gowlings firm could become part of another firm’s empire.”

Especially not one with a US presence.

Not very long ago Ogilvy Renault, Lang Michener, Fraser Milner Casgrain and Davis & Co. were familiar names on the Canadian legal map. Norton Rose, Dentons and DLA Piper were also familiar — as foreign firms.

In the last five years, the map has been redrawn at the speed of light.

Consolidation is happening not just in Canada but around the world, says Zeughauser Group’s Peter Zeughauser, a California-based law firm consultant who also maintains offices in China. Zeughauser says it’s because the legal industry is “unnaturally fragmented.”

“If you look at, say, the AmLaw 100 firms, nobody has more than 2 or 3 per cent market share. Eighty of the AmLaw 100 are the largest firms in the world and they have an even smaller share of the global market. That’s going to consolidate.

“If you look at advertising or accounting, you have a few major players who have much bigger market share than that and certainly in consumer goods, automobiles, the big players have 17‒20 per cent of the market. There may be some concerns in legal because of conflicts. That’s not so much true elsewhere in the world as it is in the US and Canada but, even so, I think we’re at a point where it’s just an industry pressure.”

Those firms looking to grow global market share began to really notice Canada about six or seven years ago, he says. The high amount of cross-border work and a hot energy sector, combined with a G-7 economy and a banking industry stable enough to withstand the worst of the 2008 financial crisis, put Canada high on the list of desirable expansion markets.

At the same time, “there was a recognition on the part of the global firms that there weren’t an infinite number of attractive Canadian merger partners so if you wanted to be in Canada, you needed to move quickly because the better firms would not be available as merger partners forever.”

Zeughauser, who has advised Canadian clients for 15 years, does not expect the pace of international mergers to continue matching the pace of the last few years. For one thing, he says, the better firms still available – and by that he means the ones that consistently top the transactional league tables – have little impetus to throw their lot in with another law firm.

“They’re plenty strong and they attract a lot of work from many different sources. So for the foreseeable future they’ll have the option to do what they want – combine or not – and that’s an enviable position. They can go it on their own. It’s characteristic of other markets around the world that the strongest firms can remain independent.

“You’ve got the Magic Circle Firms, the Wall Street firms and, even in the sub-markets within the US, you have stronger firms that remain independent so far like Morrison & Foerster, Orrick, [Herrington & Sutcliffe], Winston [& Strawn], Sidley [Austin] and Vinson & Elkins. There’s a long list of markets where the strongest firms remain independent.”

Independents that don’t have the financial wherewithal to grow in their important markets are the ones that might consider making a move, Zeughauser says.

“It takes great financial strength to remain independent. If you don’t have it, one way to build it – and there’s no guarantee of success – is to build revenues through scale.”

Does Zeughauser see two of the major Canadian independents getting together to create a national powerhouse? He says while not impossible, “it’s extremely unlikely. They sit across the table from each other on deals, they know each other, they’re out competing and telling the marketplace why they’re better — and they believe this stuff. So it would be very hard to get that kind of deal done.”

Negotiating the actual merger or alliance is one thing. Getting it done – and actually integrating two firms – is another matter, he says. Whether local, national or international, that part requires an enormous number of compromises on everything from name, governance structure, leadership positions, conflicts and even who makes equity partner, he says.

“There aren’t any deals that happen where there are no compromises. If anybody tells you that, then they probably believe in Santa Claus.”

Andy Kent probably doesn’t believe in Santa Claus but he insists he doesn’t believe in compromises either. Just making adjustments.

Kent, who stepped down as CEO of McMillan LLP at the end of the year after a decade at the helm, knows a bit about what it takes to knit two law firms together. He negotiated and implemented three all-Canadian mergers that transformed the old McMillan Binch LLP into a new pan-Canadian firm.

“In some ways the deals were a lot easier to do than the integration process afterward,” says Kent. “The tricky thing is can you create something that is positive and strong for the long run. Nobody teaches that stuff in law school and that’s the tricky part of it.”

He says the best way to manage a law firm merger without major compromises is to find the right partner. “We looked for merger partners who were open to doing deals on certain terms which were, basically, we always had a single profit centre from the first day and everybody was in it together from day one.

“I think every merger requires adjustments on all sides, regardless of what the piece of paper says. The reality of living together requires ongoing adjustment — how much adjustment depends on the philosophy of the new firm.

“Some firms in Canada have every office as a separate profit centre, some fall under the category of hotels for lawyers where you share expenses and do your own thing. There’s nothing wrong with those models – they’re just models – but they probably require less adjustment than a fully integrated firm.”

Asked whether he has had to cut entire practice areas in any of the mergers he negotiated, Kent replies by saying, “there should be the assumption that in any significant merger there will be some practice adjustments made.

“There will be people who don’t see the benefit of being part of the new organization. Derrick Tay – and I’ll pick him because he said this publicly — left Ogilvy Renault when they did the Norton Rose deal and he went to Gowlings. He said in a very public way that while he thought the deal was great, it didn’t make sense for him to be tied up with an international firm, that it was going to affect the relationships he had with various US firms, and he didn’t want that tie-up.

“So there are those kinds of tactical adjustments you have to address.”

Jolliffe says the prospect of merging with a firm that had US offices – which entailed walking away from existing US relationships and referrals – underpinned Gowlings’ thinking.

The more he thought about how his firm should move in the future, he says, the more convinced he became that joining a firm that practised US law was not the right answer for them. While several international suitors had been courting them at that point, many, if not most, had offices in the US.

Funnily enough, Wragge Lawrence Graham & Co, or WLG, was not one of the suitors. “It was the larger global platforms that were interested in a Canadian outpost.” Gowlings had known UK-based WLG for a quarter century, and the two firms had a good referral relationship.

Jolliffe believes they made the first approach. “I’m not exactly sure whose suggestion it was first — I think it was them. They realized they could only go so far with the size and client base they had, and were very interested in North America and toying with the idea of hooking up with a US firm. But they came to the conclusion they, too, had too many good relationships to go that route.”

Merger discussions began in earnest about a year-and-a-half ago and it quickly emerged that Jolliffe and David Fennell, WLG’s Chief Executive Officer, had excellent chemistry. (Jolliffe calls the personal chemistry “the most important thing” in getting a merger done.)

The two firms set up joint groups in various practice areas and industry sectors and had them talk about how a combined group would work. That feedback, forged in a year of debate, became the basis for the merged firm’s strategy, Jolliffe says. “In 10 years, the majority of our work will be domestic work, so it was fundamentally important we get our people who do domestic work onside.”

Jolliffe says the head of his firm’s business-law group called WLG “our European doppelganger,” while Fennell says something very similar from London. “We discovered early on that its people were very similar to our own and that its management had a similar vision.”

Both men say key practice areas turned out to be surprisingly compatible, areas such as energy and natural resources, intellectual property, life sciences, technology, projects and infrastructure.

The one area the two firms won’t put together is the profit pool. Jolliffe says that was to avoid tax consequences. “We decided from a client perspective we would be one firm in terms of our approach to pricing and staffing and service integration, so that led to a structure that is not unlike the Swiss verein. But we chose a UK company limited by guarantee.

“Our view is that on everything other than the merger of the financial accounts, we should be one firm, treat the clients of one firm as if they were clients of the other, and apply the Canadian, more stringent, rules on conflicts. The same with retainer letters and principles relating to pricing, billing and staffing.”

At DLA Piper, the single best piece of advice Canadian Managing Partner Robert Seidel has for any firm contemplating joining forces with a large international firm is to do the conflict checks very early. “Go there first. You don’t want to go down the path and have unexpected, unintended consequences jump out at you later.”

As for finding the right partner, like Jolliffe, Seidel alludes to personal chemistry. “It’s like doing a deal. You know, you just know, within a half hour after the kickoff meeting, you’ll know there’s something here. I can tell you, one of the most impressive things about DLA Piper, when we were Davis, was the tone from the top. Roger Meltzer has superb leadership skills.”

Finding the right fit also boils down to law firm culture, he says. “The cultures don’t have to align perfectly but they shouldn’t be inconsistent. If there are inconsistencies, you need to study them and understand them before the fact so that you can explain them.

“Maybe things are done differently in the UK, if so, why are they done differently? It’s not just that they don’t share our values — often there’s a reason behind why things are done a certain way. It could be legacy reasons, sometimes it’s regulatory reasons, sometimes client-driven reasons. But really getting an understanding of shared culture and differences is hugely important.”

Compensation is also important, he says — the grids don’t have to be the same but the firm should be rewarding the same types of behaviour.

“If the other firm is rewarding behaviour and your firm is not, you go back to the question of why. Why is it done that way? What are the reasons, and is there something you can take from it?

“So, for example, does the system reward efforts toward integration? If you tag in with another firm, rewarding that kind of behaviour is important.”

Not every firm grappling with the pressures of globalization is willing to fit themselves in with another firm. And not everyone wants to go big.

His firm has been solicited to merge with large international firms “on numerous occasions,” he says, but always declined. “We resisted because we think what we’re doing is the right strategic move long term.”

Dellelce sees the market over the next few years splitting into international and hyper-local, as well as full service versus niche. “You see the Norton Roses, the Dentons, the DLA Pipers and the Gowlings all doing the full-service, multi-country disciplinary practice. Then you see the Goodmans and Torys, geographically specific and practice specific.

“Frankly, to be able to do everything is not even practical anymore because clients are so fee sensitive that to have a model that works for all the disciplines is next to impossible. I don’t know how you have a partner that does wills and estates next to a partner doing high-level public M&A.”

While the niche model has worked very well for his firm, he says, it requires tight focus and discipline. “When times are slow, people are anxious to take any work that comes in the door. So you have to be disciplined and say no, even though it would make financial sense to do so. What I hear often from colleagues is: ‘It’s billings we wouldn’t have otherwise.’ You have to resist that, because it’s a slippery slope.”

Regional firms outside Canada’s major business-legal hubs are also feeling the effects of internationalization while dealing with a very different market. Atlantic Canada, for example, is more rural than the Canadian population as a whole, says Raymond Adlington in Halifax, Managing Partner and CEO of McInnes Cooper, with a significantly larger proportion of locally owned businesses.

That does not exempt them from the forces of globalization. “And if our clients feel the pressure, so we feel the pressure too,” Adlington says from Halifax.

McInnes Cooper has responded by bulking up to strengthen its market position, he says, and it joined Lex Mundi, a network of law firms with 160 firms in more than 100 countries. Member firms refer to one another and work together across borders.

While McInnes Cooper has not been approached by any of the larger international firms, he says, “we have been approached by some of the larger Canadian firms.” Apparently not with a proposition that has been tempting enough so far.

Asked whether he believes Atlantic Canada’s regional firms could eventually merge with one another to better withstand globalization and even competition from national firms, he says no. “Unless the conflict of interest rules change materially, I don’t see how that would be possible because so many of our matters involve clients of the other two [major] firms.”

McInnes Cooper, at least, also has “hundreds of corporate clients with no physical presence in Atlantic Canada,” says Adlington, so what is more likely in terms of strategy is that his firm would move into new Canadian markets.

“We think eventually we will be building up locations outside Atlantic Canada as our client base expands. But by and large, the reason clients are engaging us from outside Atlantic Canada is we have the same level of expertise, but we don’t have the same cost structure.”

The first Canadian firm to join forces with a global entity was the old Ogilvy Renault.

Norman Steinberg, Ogilvy’s former Chairman – now Global Vice Chair of Norton Rose Fulbright – says several factors played into the decision. Many sound like the same thinking used by Jolliffe and Seidel for their firms.

“Five years ago when we looked at our strategic plan, there were some obvious points,” Steinberg says. “Number one was that Canada was a small market where our clients were basically expanding internationally, so we needed to have an international network. We had already rejected the business model we had then of having representative offices.

“The second point is we felt a globalized economy, we needed greater resources in Canada to invest in technology, training of our lawyers and our staff, business development, marketing and generally the coordination of client relationships. We also felt that even though we were a large law firm in Canada, we needed greater expertise available than was at our fingertips, which is provided in a larger platform.”

The original merger was followed by mergers with Calgary-based Macleod Dixon LLP and Houston-based Fulbright & Jaworski LLP. Norton Rose sees the US market as key internationally and particularly for the Canadian market.

While Norton Rose is still digesting, Steinberg is convinced the large international platform he helped create – while not right for all firms – is absolutely right for them. “It’s a question of integration, cross-marketing and then defining what our next steps are.

“The business environment generally has changed tremendously and the business environment for law has changed tremendously exponentially. You can’t be complacent.”

Law Firm Alliances and Networks: The Middle Ground

For many law firms, a full merger with another law firm is not the best strategy to withstand the prevailing winds of internationalization. Law firm alliances and networks provide an opportunity to connect with firms in other jurisdictions without taking the full merger plunge. Below is a selection of law firm alliances and networks available to law firms: